Nine months before Enron Corp. flamed out in bankruptcy, some investors were questioning the strength of its businesses despite public assurances from company founder Kenneth Lay and former CEO Jeffrey Skilling that all was well, jurors in their fraud and conspiracy trial learned Wednesday.
Those questions and a stock price that dropped to less than $60 per share from its high of $90 in August 2000 prompted Skilling to hold a conference call in March 2001 to reassure Wall Street that Enron was healthy.
“I have no idea why the stock is down,” Skilling told analysts who influenced the stock price. “I know this is a bad stock market, but Enron’s in good shape.”
The audiotape was played during former Enron investor-relations chief Mark Koenig’s fifth day on the witness stand.
Prosecutors have played clips of videos and audio tapes to bolster allegations that Skilling and Lay repeatedly lied about Enron’s financial health and hid bad news to inflate company stock. But the defense teams wanted to play them in full to ensure jurors heard the comments in context. U.S. District Judge Sim Lake acquiesced, on the condition that they be played only once in their entirety in the trial expected to last months.
The defendants counter that there was no fraud at Enron and its implosion stemmed from negative publicity that triggered a loss of market confidence.
Koenig pleaded guilty in August 2004 to aiding and abetting securities fraud for lying to investors about Enron’s finances. He is among 16 ex-Enron executives who have pleaded guilty to crimes and are cooperating with prosecutors.
Days before the March 2001 conference call, Enron announced that a 20-year video-on-demand partnership with Blockbuster Inc. was dead, a year after the company announced the deal with much fanfare as a venture that could bring in billions.
Questions were generated by that about-face and other issues, such as the meltdown of the telecom industry just as Enron was pushing its plan to trade bandwidth.
“Mr. Skilling was very up to speed on what investor concerns were,” Koenig testified.
Skilling told analysts on the call that Blockbuster hadn’t gotten the movies to provide video-on-demand, so Enron was “out getting the content ourselves.” He also sought to squelch rumors that Enron’s bandwidth trading efforts were flailing, noting, “This business is absolutely developing, it is ahead of plan, and I expect this to be a good business for us going forward.”
Such optimism is common from CEOs on analyst calls. The question for jurors is whether Skilling knew his optimism was false.
Investigations revealed later that neither video-on-demand nor bandwidth trading got off the ground.
The day of the call, Enron stock opened at $55.09 and closed up $4.31, at $59.40.
As lead Skilling lawyer Daniel Petrocelli played an April 2001 conference call regarding first-quarter earnings that year, Koenig said Skilling gave analysts incomplete information about why the company folded its retail energy unit’s trading operations into the bigger division that included all other types of trading.
Skilling told analysts the consolidation combined duplicate functions to increase efficiency. Koenig said the move was intended to hide the retail unit’s losses from investors.
“I’m saying the disclosure that it was done for efficiency purposes was wrong,” Koenig said.
Earlier Wednesday jurors got a taste of the self-congratulatory culture that permeated the company months before it filed for Chapter 11 bankruptcy protection in December 2001.
Lay and Skilling occasionally headlined employee meetings during the company’s halcyon days that mixed rundowns of business operations with pep rallies.
Jurors watched a lengthy videotape of the first such meeting Skilling led in February 2001 after he succeeded founder Lay as chief executive. During the nearly hourlong video, both Lay and Skilling unveiled Enron’s vision to be the world’s leading company, as they basked in applause from employees.
“This is it,” Skilling said as Lay pulled a cord to display a banner that said, “From World’s Leading Energy Company to World’s Leading Company.”
On the tape, Skilling acknowledged that Enron’s earnings were a “black box,” meaning outsiders couldn’t ascertain how it made money. “I’m sorry, it’s true, it’s just difficult for us to show people how money flows through particularly the wholesale business,” he said on the videotape, referring to the division that included trading.
But Skilling said Enron’s businesses were growing, so “that’s a good black box.”
About nine months later, what was once the nation’s seventh-largest company collapsed amid revelations of billions of dollars hidden debt and inflated profits.
Skilling faces 31 counts of fraud, conspiracy, insider trading and lying to auditors, while Lay faces seven counts of fraud and conspiracy. Both face decades in prison if convicted. Both sold millions of dollars in stock before Enron went bankrupt, but only Skilling faces allegations of improper stock sales.